World Markets in Motion

US Industry Overview

Tuesday, October 30, 2007

Many speculators, myself included, love to analyze Peak Oil or the plateauing and decline of global oil production. The problem however, with determining global Peak Oil has long been convoluted due to the inherent elusively of Saudi Arabia. Unlike the publicly traded oil conglomerates such as Exxon Mobil(XOM), BP plc(BP) or Total(TOT), Saudi Aramco isn't bound by full disclosure. Since Saudi Arabia has the world's largest proven reserves and Saudi Aramco is the world's largest oil producer, the theoretical peaking of Saudi Arabia could indicate the world’s peak.

For those unfamiliar with Peak Oil, it is the inevitable peaking of any given oil well, or the point of maximum production and subsequent decline. This theory was first presented in 1956 by an American geophysist, Marrion King Hubbert. His theory was initially scoffed at, but has since received notoriety as he accurately predicted the United States' 1970 peak.

Despite King's genius, experts are still divided on the validity of a global peak. Some argue that improved technology and greater exploration can prevent it, but the undeniable fact remains that the world's most technologically advanced nation, the United States has been unable to prevent it's own peak. With this premises it seems unlikely that the less developed world will be exempt from a similar fate. Still other, more optimistic critics argue that oil is somehow a renewable resource.

This week during an interview, former head of exploration and production at Saudi Aramco, Sadad al-Huseini disclosed that, "oil production had reached a structural ceiling and that the technical floor for the oil price will rise by $12 annually for the next 4 to 5 years as new fields become increasingly costly to exploit." According to al-Huseini, "the technical floor - the basic cost of producing oil excluding factors such as geopolitical risk and hedge fund speculation - is currently about $70 per barrel, meaning the minimum oil price could hit $106 in 2010 and $130 by 2012. Actual crude prices, including financial market factors, could be as much as $125 by as early as 2010."

This disclosure by Sadad al-Huseini is important for many reasons. First, it marks a rare instance of blatancy from a Saudi oil insider. Second, it presents additional validity to the theory of global Peak Oil. Finally, this omission aligns with other renown advocates like Matthew Simmons. With Peak Oil, hindsight truly is 20/20. We won't know our actual peak until we see it in the rear view mirror...